A zero balance account (ZBA) is just what it sounds like: a checking account with no balance. When money is needed in the ZBA, it is automatically transferred from a central or master account in the exact amount needed. Deposits are often swept through the master account on a regular basis. Zero balance accounts are often used by corporations to ensure that funds are readily available through departments, to remove excess balances in separate accounts, and to retain better control over fund disbursement. Payroll, petty cash, and other related needs are handled by these accounts.
What are Zero Balance Accounts and How Do They Work?
The master account is a centralised location where an organization’s funds can be managed. When funds are required in the ZBA checking account to cover a fee or transaction, they are transferred in exact amounts from the master account. Since the process is completely automated, there is no need for an employee to do it manually.
Instead of making small dollar sums idle in a number of subaccounts, more capital is available for investments by concentrating funds in the master account. When compared to the subaccounts, the master account also has additional advantages, such as a higher interest rate on balances. The master account isn’t a savings account, but rather a different, more lucrative bank account. As a result, ZBAs increase the amount of money available for investment thus lowering the possibility of overdraft fees.
When a ZBA is used to finance the organization’s debit cards, all of the operation on the cards is pre-approved. Since there are no idle funds in the ZBA, a debit card transaction cannot be completed before funds are added to the account. This will aid in the management of business expenditures by reducing the likelihood of unapproved activities occurring.
When handling incidental charges across a large organisation, using a ZBA as a spending management tool is particularly useful. Though operating costs are usually easier to estimate and budget for, incidentals are by their very nature unpredictable. It is more likely that proper approval procedures will be followed prior to the completion of a transaction if easy access to funds through debit cards is restricted. This makes it simple to monitor transactions and reconcile accounts.
Special Considerations for ZBA
To improve budget management and make the process of allocating funds more effective, an entity can have several zero balance accounts. This may involve having a different ZBA for each department or feature as a way to keep track of charges on a regular, weekly, or annual basis.
Other explanations for establishing separate ZBAs could include the financial management of specific short-term projects or those with a high probability of unforeseen overruns. Excess charges without due notice and approval can be avoided by using zero balance accounts.
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A cash pooling scheme includes a zero balance account (ZBA). It normally takes the form of a checking account that is automatically financed from a central account in a sum appropriate to cover the checks presented. To do so, the bank totals all checks presented against a ZBA and pays them out with a debit to the central account. In addition, if a deposit is made into a ZBA account, the balance is immediately transferred to the central account. In addition, if a subsidiary account has a debit (overdrawn) balance, cash is immediately transferred from the central account to the subsidiary account in a sum sufficient to restore the account balance to zero. Furthermore, rather than zero, subsidiary account balances may be set to a fixed target number, ensuring that any remaining cash is kept in one or more accounts.
There are three different ZBA transactions that all happen automatically
Extra cash is transferred to a central account.
Cash is moved from the central account to connected checking accounts to fulfil payment obligations.
Cash is transferred from the central account to linked accounts to cover debit balances.
The net effect of a ZBA is that an organisation keeps the majority of its cash in one place and only distributes cash from that central account to meet immediate needs. Since there is very little cash in the zero-balance account, this method often decreases the possibility of a fraudulent transfer. The ability to aggregate cash to take advantage of better investment options is a key benefit of the zero balance account.
By linking top-level strategic goals to particular functional areas of the company, ZBB enables top-level strategic goals to be integrated into the budgeting process, where expenditures can be first clustered and then evaluated against past performance and current expectations.
Because of its detail-oriented nature, zero-based budgeting can be a multi-year process, with managers or group leaders reviewing a few functional areas at a time. By avoiding blanket raises or reductions to a previous period’s budget, zero-based budgeting will help cut costs. However, it is a time-consuming method that takes much longer than conventional cost-based budgeting. The practise often favours divisions that generate direct sales or output, as their investments are easier to justify than those in customer service or research and development.
Traditional Budgeting vs. Zero-Based Budgeting
Traditional budgeting requires modest changes over previous budgets, such as a 2% rise in expenditures, rather than a justification of both old and new costs, as zero-based budgeting requires. Traditional budgeting examines only new expenditures, while ZBB begins with zero and requires justification of both old and new recurring expenses. Zero-based budgeting seeks to place the burden of proof on managers to justify spending, and it aims to maximise an organization’s value by less costs rather than increasing revenue.
